New frontiers to outpace emerging markets

Fund managers searching for yield are increasing exposure to frontier markets (FM) as a diversification from emerging markets (EM), as the latter have been offering negative relative returns since January, according to MSCI data.

Barings Asset Management said on Monday it plans to launch a frontier markets fund in coming weeks, with a projected 70 percent exposure to frontier markets such as Nigeria, Saudi Arabia, the UAE, Sri Lanka and Ukraine.

Emerging markets indices posted relative negative returns compared to developed and frontier markets in the first quarter, index compiler MSCI’s 2013 quarterly survey showed. The main emerging benchmark returned a negative 2.14 percent for the quarter, with the BRIC index also posting a loss, though a better performance of Latin American markets offered some promising signs with a 0.48 percent increase.

Southeast Asia posted the top returns, with double-digit figures from the MSCI Philippines Index of 17.87 percent growth and Indonesia returning 13.19 percent. That was a stark contrast to the Brazil, Russia, India, China and Korean indices, which delivered negative Q1 results.

Weak relative performance has turned investors further afield to boost earnings with top performers Kenya, UAE and Bulgaria returning more than 20 percent. In 2012 the Kenyan benchmark rose 54 percent, the data showed.

Frontier economies have young, growing populations and a strong base for domestic demand and labour, and according to Barings, FM countries hold around 30 percent of global oil resources. FM markets are boosted by strong foreign direct investment trends and generally low levels of government debt.

Michael Levy, investment manager at Barings, said in a statement:

“Over the last 20 years, the free float market capitalisation of core emerging markets (MSCI Emerging Markets) has increased 25 fold and we believe that frontier markets are now positioned where emerging markets were 20 years ago, poised to become the next big opportunity in the coming years.”

Countries included in the MSCI FM index include Kenya, UAE, Bulgaria, Vietnam, Nigeria, Bangladesh and Slovenia. Barings research focuses on Iraq, Ghana, Qatar, Nigeria, Sri Lanka, Bangladesh, Vietnam and Kenya – all with compound annualised GDP growth rate projections above 5 percent from 2010 to 2017, according to IMF and the World Economic Outlook database.

HSBC, however, points out that FM equity markets overall have performed less well over a four-year time period, but with three countries ( Sri Lanka, Romania and Estonia) outperforming the EM benchmark.

HSBC analysis shows frontier markets dividend yield is set to rise to 5.5 percent in 2013, compared to 2.9 percent in emerging markets, while return on equity for FM is seen at 20.5 percent versus 13.6 percent for EM.

“In a low interest rate world, dividend yield is likely to be an increasing focus for investors – and this clearly plays to the strengths of FMs.”